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1 CHAPTER 14FREE CASH FLOW TO EQUITY DISCOUNT MODELSThe dividend discount model is based upon the premise that the only cashflowsreceived by stockholders is dividends. Even if we use the modified version of the modeland treat stock buybacks as dividends, we may misvalue firms that consistently returnless or more than they can afford to their stockholders.This chapter uses a more expansive definition of cashflows to equity as thecashflows left over after meeting all financial obligations, including debt payments, andafter covering capital expenditure and working capital needs. It discusses the reasons fordifferences between dividends and free cash flows to equity, and presents the discountedfree cashflow to equity model for valuation.Measuring what firms can return to their stockholdersGiven what firms are returning to their stockholders in the form of dividends orstock buybacks, how do we decide whether they are returning too much or too little? Wemeasure how much cash is available to ...